Do you want to pay for the Sub-Prime freeze?

[Texas Proud]

Brewer...

You probably have seen how the CMOs are structured... I handled insurance trusts and some CDOs, but knew people who did the CMOs... some have HUNDREDS of traunches...

Now, this total risk has not been changed at all.. so there are some who are winners and some who are losers.... it is kind of hard to ask a winner to give up his 'win' to bail out the loser...

If you had bought an IO, then I would think that it would have some value as the interest rate goes up with only a certain amount of defaults... but if to many defaults then it might not be... but if you keep interest low, then for sure you lose..

We will see what happens... but I still think it should be 'the market' that fixes the problem without any bailout money from the gvmt... talk is fine, but $$$$$s are bad.

 

[pedorrero]

Interesting thread. I find amusing Brewer's faith in the Republicans being anti-big government (War in Iraq? Illegal spying and evesdropping on U.S. Citizens' communications? Holding citizens without trial? Medicare drug hike is fiscally conservative? Not sure...) But I'm getting off topic here.

About bail-outs: the government has been screwing the citizens and bailing out cronies longer than anyone here has been alive. Just look at the depreciation of the dollar just in your lifetime. It's headed for zero, and then we will have an unpleasant time for all.

The biggest problem with government bail-outs is we're against them when they're for somebody else, but when YOUR ass is in a sling, of course the government should bail me out!

-- Pedorrero, who will put a "Paul 2008" sticker on his car, if he finds one.

 

[brewer12345]

Interesting thread. I find amusing Brewer's faith in the Republicans being anti-big government (War in Iraq? Illegal spying and evesdropping on U.S. Citizens' communications? Holding citizens without trial? Medicare drug hike is fiscally conservative? Not sure...) But I'm getting off topic here.

You've got to be kidding. I think those people are assclowns, but they clearly do not wish to stick their hands into the markets (civil rights, sovereign nations, torture, etc. are obviously another matter). But even these clowns have had it explained to them that something needs to be done. If they can get all the parties to agree on how loans can be modified, it reduces the chances that a real gummint bailout will be required. There will still be plenty of pain to go around.

 

[DRiP Guy]

Ummm, you do know that US laws were originally written in part to allow defaulting debtors to have other options than debtors' prison, right? What would you like to do with those who default? 40 lashes and a year of hard time?

Indentured servitude until they make good on the bill suits me just fine.

 

[Gumby]

Good. You can come sleep in my garden shed and work on my lawn. I'm tired of raking leaves.

 

[armor99]

Wow.... this topic just keeps coming back to this forum it seems. But you will not find any name calling, inflamatory statements, or wishful thinking coming from me. Folks who inject such statements into this thread make themselves look foolish, and do not help their arguement, if in fact that was really their intention at all.
When you break this issue down all the way, it really has to do with individualism, vs. collectivism. Yes... I have mentioned this before, but it seems to bear out repeating again. individualism says, "What is best for me?". Collectivism says, "What is best for all of us?". While the above two statements seem obvious, some of the implications of it are certainly not.
So you have a bank that made an irresponsible loan, and a person that was foolish enough to accept it. We are assuming here that no coersion was being used (no knives, guns, kidnapping of family members etc) to make either party go for that loan. This was an individual's personal decision. Now you have thousands of such individuals decisions that are just as bad going on, that has led us to the subprime mess that we currently find ourselves in.
There are many here that have expressed the position that the govt needs to do something, because the govt inaction will cause banks to fail, people to lose their homes, and the economy in general will tank. All of these things are probably true. As least for the short term they will be. If the govt does intercede, and artifically "helps" this situation, a lot of that pain to the economy, and to individuals can be reduced or eliminated. However, there is no such thing as a "free lunch", even for the govt. When the govt steps in and "helps", it encourages more of the the "irresponsible" behavior that occured in the first place. Sort of like when a drug addicts parents give the child money "to help them" that they know will be going for drugs. In the short term it takes away their pain and suffering, but in the long run, it just makes things even worse.
If people in this forum still believe that the collective "all of us" (when they talk about the economy, jobs, etc) are more important than the individual's wants, then let me ask the following questions. Should the govt outlaw Mcdonalds and all fast food restaurants? The US would be healthier if that option was not available, and medical costs would go down. Should boxing be outlawed as a sport? A very large percentage of boxers have long term medical problems that are directly related to their time spent in the ring.
How about a question near and dear to everyone in this particular forum. Should the govt outlaw early retirement? The more people that we have in the workforce, the more taxes are being paid. The more taxes that are being paid, the more SS can be funded, and that helps out everyone... doesn't it? IMHO our democracy protects the individuals right to choose for himself. And sometimes those decisons are bad, even disasterous. Sometimes the problems are so bad, that it can affect larger things like the economy as a whole. But the fact remains, that I would much rather live in a system that allows my failure by my own hand, than a system that denys my right to choose because I might pick a bad road for myself. I am an adult.... I live for myself... and not for others.

 

[brewer12345]

So, Armor, you don't use public roads? Think the military is an abomination? Can't stomach the thought of clean air regulations, drug purity standards, etc.?

I think this is not the thread for another "Atlas Shrugged" diatribe.

 

[Retire Soon]

I agree with Texas Proud that home prices have been artificially inflated because of subprime loans. This will eventually correct itself. Home prices tend to go down slowly, but this correction will take place slightly faster this time because of the huge number of foreclosures. When an appraiser goes out obtain comparables for a house that has sold, there is a good chance that he may have to use one of the foreclosures in the neighborhood to base his appraisal on. This will have a serious impact on prices, especially areas where there are a high percentage of subprime loans.

The problem though is this: Too many people went out and refinanced their homes with the inflated prices and cashed out. Many others obtained seconds on their home. Basically, homes were used as an ATM machine.

Many banks are reporting that people are now maxing out their credit cards, as they've used up all of the equity in their homes and have no where else to go for money.

IMHO, the problem with the artificially inflated home prices, is that Americans have borrowed more money than if the subprime money had never become available. I'm not referring to just the homes that were purchased with subprime money, but the resulting 1st and 2nd mortgages that people took out because of the "wealth effect."

Two-thirds of GDP is consumer spending. With so many having already taken all of the equity out of their homes and maxed our their credit cards, what will drive the economy? It was the housing market that helped prop of the economy after the dot-com bubble burst. What will serve to prop up the economy this time?

It's my belief that we are in for one of the worst recessions in U.S. history. In fact, it's probably already begun.

Another thing to take into consideration is to what extent this bailout and subsequent freeze on interest rates will help. The whole notion of a bailout is based upon the premise that people want to stay in their homes. When home prices drop 20% in some areas and people are upside down on their mortgage anyway, with huge payments and rental prices going down, many will elect to walk away from their mortgage responsibility. What will they have to lose, but bad credit for 7 years?

Let's face it, right now the U.S. Treasury, banks, securitization trusts, and federal and state governments are running scared and have a very good reason to be. Many of these subprime borrowers have bad credit and are not the most responsible people in the world. What makes anyone think they will sacrifice to stay in homes with increasing negative equity?

 

[Nords]

If people in this forum still believe that the collective "all of us" (when they talk about the economy, jobs, etc) are more important than the individual's wants, then let me ask the following questions. Should the govt outlaw Mcdonalds and all fast food restaurants? The US would be healthier if that option was not available, and medical costs would go down. Should boxing be outlawed as a sport? A very large percentage of boxers have long term medical problems that are directly related to their time spent in the ring.
How about a question near and dear to everyone in this particular forum. Should the govt outlaw early retirement? The more people that we have in the workforce, the more taxes are being paid. The more taxes that are being paid, the more SS can be funded, and that helps out everyone... doesn't it? IMHO our democracy protects the individuals right to choose for himself. And sometimes those decisons are bad, even disasterous. Sometimes the problems are so bad, that it can affect larger things like the economy as a whole. But the fact remains, that I would much rather live in a system that allows my failure by my own hand, than a system that denys my right to choose because I might pick a bad road for myself. I am an adult.... I live for myself... and not for others.

Maybe you should take these musings to your own new thread instead of perpetually inserting inflammatory strawman arguments into a fairly straightforward discussion about the govt's attempt to influence the subprime mess.

But you can do it without me.

 

[brewer12345]

Another thing to take into consideration is to what extent this bailout and subsequent freeze on interest rates will help. The whole notion of a bailout is based upon the premise that people want to stay in their homes. When home prices drop 20% in some areas and people are upside down on their mortgage anyway, with huge payments and rental prices going down, many will elect to walk away from their mortgage responsibility. What will they have to lose, but bad credit for 7 years?

A few quibbles:

- Any freezes as being suggested would only be for people who have kept current on their loans and want to stay in the house. Otherwise, its going to the courthouse steps, if it hasn't already.
- Many people are very happy living where they are and will stay there if they can keep up with the payments. Others won't be willing or able to take a loss by walking away (sunk cost fallacy at work here on a grand scale). Personally, I don't care what my house is worth. I only want to live there.
- Rents in many areas are going up, not down. The people who used to be buying houses for the first time now are shut out and must rent at the same time that many formers owners are no longer owners. Obviously this varies considerably by market.

 

[ERD50]

So, Armor, you don't use public roads? Think the military is an abomination? Can't stomach the thought of clean air regulations, drug purity standards, etc.?

I think this is not the thread for another "Atlas Shrugged" diatribe.

I think it goes hand-in-hand with a thread about 'should we pay to bail out xyz'. Not off-topic at all, IMO.

The other govt services you mention would be supported by all but the most hardcore - and they are already living in cabins in the mountains. The phrase, ' provide for the common defence' is in the Constitution. I think the problem stems from that vague line in the Constitution 'promote the general Welfare'.

So, is bailing out people who took on too much/risky debt 'promoting the general welfare'? If it helps smooth out an overall recession, maybe it is? OTOH, if it ends up encouraging risky behavior, because there is always a safety net, then maybe it isn't?

I don't know enough of the details to know which way to 'vote' on the issue, but my general feeling is that bailouts create more problems in the long run. But I'll hedge that, and say that there are exceptions.

-ERD50

edit/PS - sorry, did not see there was already discussion on starting another thread - hope this does not step on any toes, JMO

 

[deserat]

The pony - from my individualistic viewpoint -thank goodness I'm not someone who is in the position of having taken a second mortgage to pay for my SUV and HD TV - thank goodness I am near to having a paid for roof - thank goodness I don't want an SUV and HD TV (spouse may argue about the second one, but we will wait until the TV market settles down) - thank goodness I decided that retiring early was a goal and redirected my effort in money management and lifestyle management towards that aim allowing me to muse about this 'mess' and become educated without having the flames scorch me.

Very interesting thread, though - sometimes when systems decouple too much and don't understand their impact on interfacing systems, you end up with undesired consequences - reminds me of the middleware guys telling me I just need to upgrade the input and output sides to get advantage of their middleware system -hmm, it costs more to upgrade the input and output sides to meet your middleware requirements - perhaps another middleware guy is the answer ;-)

 

[emilylynn]

I have a novel idea. Relax the standards for piercing of the corporate veil, and let the individuals who designed and profited from this fraud take their licks along with the affected homeowners. I don't much care how the losses are allocated so long as they are not once again foisted off on the general public.

 

[emilylynn]

In case you didn't already know that a taxpayer bailout would be forthcoming, here's the first:

"Today, we are proposing to allow state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancing," Paulson told a housing conference sponsored by the Office of Thrift Supervision. "If enacted, this would reduce the cost of innovative mortgage programs."

Paulson outlines mortgage-aid plan - Yahoo! News

 

[brewer12345]

I have a novel idea. Relax the standards for piercing of the corporate veil, and let the individuals who designed and profited from this fraud take their licks along with the affected homeowners. I don't much care how the losses are allocated so long as they are not once again foisted off on the general public.

What on earth are you talking about? Only fraud I am aware of is borrowers lying about their income and occupancy status in order to get a loan they shouldn't have.

 

[Payin-the-Toll]

Jeez--what's the big deal. I keep seeing the streamer on Fox News that 97.4% of all mortgages are being paid on time. So if a small percentage of the 2.6% that don't actually pay on time default, could it really be that bad?

 

[tryan]

My guess is any government "bailout" will come in the form of "bailing out" Freddie and Fannie.

The dreaded private sector will have to sink or swim on thier own merit.

Several analysts asked the executives in the conference call why the company couldn't disclose what proportion of high-risk mortgages it is able to refinance into fixed-rate loans and save from default.
"The problem is that we don't have the underlying information," said Credit Suisse analyst Moshe Orenbuch.
Another analyst said in a report that Fannie's new calculation method is similar to that used by Freddie Mac, its smaller government-sponsored sibling, which also suffered a multibillion-dollar accounting scandal several years ago.

Traders wary of Fannie Mae's mortgage math - Mortgage mess - MSNBC.com

 

[emilylynn]

What on earth are you talking about? Only fraud I am aware of is borrowers lying about their income and occupancy status in order to get a loan they shouldn't have.

How about the lenders who knowingly inflated borrowers' qualifications, who obtained overblown appraisals, and who intentionally assumed risks that never would have been deemed commercially reasonable had it not been for the fact that these loans were destined for the securitization pipeline? How about the Wall Street wheelers and dealers who couldn't get enough of these loans and who tacitly approved and encouraged the practices of lenders? Or the bankruptcy-remote special purpose entities who, in concert with the lenders, managed through some feat of financial alchemy to package a single loan into multiple securitization pools? How about the ratings agencies who slapped AAA ratings on the resulting securities? How about the mainstream bond and money market fund managers who used this trash to boost returns, unbeknownst to the individual investor? This was a multi-layered fraud the success of which was attributable to the fact that when the whole thing blew up, it would be somebody else's problem.

 

[brewer12345]

Methinks you aren't all that familiar with the machinery of the mortagge market that has developed over the past few decades. And oddly enough, I heard very few complaints as the housing market rocketed upwards, fuelled by all this cash.

FWIW, the people who made the lousy loans have either gone bust or nearly so; those who bought the trashy paper wish they had bever heard of this stuff; teh rating agencies are awaiting a replay of the Congressional ass-whipping session that followed the implosion of the junk market in '02-'03; and everyone else involved has suffered plenty. I think the remedies being proposed are being offered with the intention of limiting the damage to the wider economy, which seems reasonable to me.

 

[TickTock]

When home prices drop 20% in some areas and people are upside down on their mortgage anyway, with huge payments and rental prices going down, many will elect to walk away from their mortgage responsibility. What will they have to lose, but bad credit for 7 years?

I can't locate the MSN Money article right now, but apparently the loan owner can stick you with a 1099 showing the loan cost as income to you (or maybe it's the difference between the loan amount and what the house sells for at foreclosure, I'm not sure). Then it's between you and the IRS! Not good.

Anyone familiar with this?

 

[emilylynn]

Methinks you aren't all that familiar with the machinery of the mortagge market that has developed over the past few decades.

Perhaps you could edify us.

 

[lets-retire]

How about the lenders who knowingly inflated borrowers' qualifications, who obtained overblown appraisals, and who intentionally assumed risks that never would have been deemed commercially reasonable had it not been for the fact that these loans were destined for the securitization pipeline?

1) The lenders and the government have policies to prevent issue number one. Several banks have been put on probation for proven issues. While on probation these banks must endure extensive audits by the government. If there are any errors the probation remains. Only when a bank successfully passes an audit without any errors is it allowed to resume normal operations. Unless the borrower is getting a "liar loan" all items are scrutinized very well. If an originator purposely overstates a borrowers qualifications they can be liable for several legal and civil repercussions.

2) Overblown appraisals are VERY difficult to prove. The appraisers are held to a standard and if they are caught willingly producing an inaccurate appraisal they can be held liable and can lose their license. Since appraisals are essentially one person's estimate they are like filling out your taxes. One appraiser might come in at X dollars while another comes in at Y dollars and both are correct. The people reviewing the appraisals might be able to see inconsistencies in them and send them back for corrections, but other than that they are not appraisers and short of glaring inaccuracies can not outright say the appraisal is wrong.

3) ANY loan sold to an investor must meet the investor guidelines. If it does not the loan goes back to bank granting the loan for servicing. Yes the loans are sold in groups, however each loan is entered into the investors' system and is reviewed at that time.

 

[emilylynn]

It was reported just one month ago that Washington Mutual, perhaps the largest of the country's savings and loans, is under investigation by the New York attorney general concerning allegations that it pressured a well-known title company to inflate appraisals for the purpose of qualifying individuals that would not otherwise qualify for mortgage loans.

 

[brewer12345]

I can't locate the MSN Money article right now, but apparently the loan owner can stick you with a 1099 showing the loan cost as income to you (or maybe it's the difference between the loan amount and what the house sells for at foreclosure, I'm not sure). Then it's between you and the IRS! Not good.

Anyone familiar with this?

Correct. Although there have been some noises made about striking this provision of the tax code. Not clear if this will happen, although it would seem to be a populist type sop to the masses.

 

[brewer12345]

It was reported just one month ago that Washington Mutual, perhaps the largest of the country's savings and loans, is under investigation by the New York attorney general concerning allegations that it pressured a well-known title company to inflate appraisals for the purpose of qualifying individuals that would not otherwise qualify for mortgage loans.

True. I guess I tend to discount anything the NYAG does by at least half after all the hullabaloo the current and most recent past AGs for that state raised in the past few years (that mostly amounted to very little).